For 1995, the current ratio is 1. Butler Lumber Company is a Pacific Northwest based lumber distributor that sells plywood, moldings, and sash and door products. All these ratios serve to point out the lack of cash in this company. In the foreseeable future though, once the company sheds the loans it carried and get more streamlined, it will start increasing its cash gradually. Clarkson himself leads a frugal lifestyle with little personal debt.
Further, I recommend that Clarkson Lumber limit its growth potential beyond 1996 to a maximum of 18. Additionally, not all the liability items increased by 25%. The line of credit will enable the company to take advantage of the trade discounts and pay off previous debt. As of today there are 2 remaining payments to be made on this note, June 1996 and December 1996. The note was taken to give Mr.
We should also outline, that the best option is to pay later, but we assume that from 1996 vendors will set the deadline of payment around 30 days. Clarkson Lumber Company Case Assignment : Due Oct 3 1. Basically the debt repayment terms do not match the financial strength of the business. Further it increased both sales and net income by 54% and 28% vs. The net profit margin and operating expenses ratio have been stable over three years, however, interest expenses has increased almost 1. Clarkson Lumber Case Analysis Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability? Despite these profits, there was a shortage in cash which lead to an increase in borrowing. This scenario assumes that Clarkson Lumber will keep its future w-factor close to the historical levels by continuing to take full advantage of payable trade accounts to lower the need for working capital.
Current Ratio should increase to 1. Therefore, additional source of financing should be found. Words: 1421 - Pages: 6. Therefore, Clarkson Lumber would not be able to expand in 1996. Clarkson is an energetic and hardworking business man with good sound personal financial condition and credit. Furthermore, the cash collection cycle becomes larger 59 days in year 2003, while more than 70 in year 2006.
Why is the Clarkson Company so short of funds despite its record of profitable operations? This is a company that has many good characteristics and looks promising but needs the extra money to pay off loans, inventory, and supplies. Clarkson met the financing needs of the company during the period 1993 ~1995? To achieve the expected growth rate of 22 percent for the next three years, Clarkson Lumber must continue capital expansion through 1997 that began in 1995 after rapid growth has begun a few years earlier. Cost of Goods Sold: Even though profits have been consistent, they have not increased sufficiently. The cost of goods relative to the sales is high and is keeping the profit margin low. Clarkson's financial advisor, we would caution him on expanding his business given the current financial trends and ratios of the company. However, costs of goods are.
In our live classes we often come across business managers who pinpoint one problem in the case and build a case study analysis and solution around that singular point. The answer depends on the degree to which Clarkson relies on using trade credit as a source of funds. The third problem is that the debt to asset ratio was too high in 1995. This will ease off the financial pressure 6. In turn, the bank must estimate the amount of funds actually needed by Mr. Clarkson, the probable repayment schedule, the nature and degree of the risks incurred and the appropriate terms of such a bank loan.
Inventory as a percent of sales is projected to be 13. Words: 2267 - Pages: 10. The Team Administrator keeps the group on track to ensure that the discussion is on topic without venturing out of scope for this case. Moreover, the borrowing limit set by the Suburban Bank has been reached, prompting the bank to ask Mr. Case Study Analysis Once you are comfortable with the details and objective of the business case study proceed forward to put some details into the analysis template.
Exhibit 5: Pro Forma Balance Sheet 1996 Cash 53 Accounts Receivable, net 825 Inventory 917 Current Assets 1795 Property, net 384 Total Assets 2179 Notes Payable 399 Notes Payable to Holtz, current portion 100 Notes Payable, Trade 127 Accounts Payable 573 Accrued Expenses 96 Term Loan, current portion 20 Current Liabilities 1315 Term Loan 80 Note Payable, Mr. Looking at the individual ratios seen in exhibit 1 and comparing it to the industry average shown in exhibit 2 gives a sense of where this company stands. This creates even more of a necessity to apply the increase in available credit in such a way that will reduce costs. Finally, substantial increases in working capital will be required to manage inventory and accounts payable along with any possibility spontaneous accruals or needs for cash which I assumed would not be spontaneous. Limiting growth in the two years following 1996 is important because the savings from capital expansion, variable costs, fixed costs, capital replacement, and working capital will allow Clarkson Lumber to keep its gross debt at a sustainable level.